HSBC, Standard Chartered shares trade near two-year highs as investors bet on further interest rate rises to boost margins

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HSBC, Standard Chartered, Federal Reserve, UK regulators, hit an 11-year low

UK lenders HSBC and Standard Chartered, which derive most of their profits in Asia, are trading near two-year highs in Hong Kong, as investors bet higher interest rates globally will bolster their bottom lines.

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Both lenders, alongside their industry peers, have seen their shares advance since the start of the new year as it became clearer that central banks, from the Federal Reserve to the Bank of England, would need to increase their policy rates to address a rapid rise in inflation.

The rapid growth of Western economies as they recover from the coronavirus pandemic, alongside higher fuel costs, have contributed to rising costs of living. Recent government reports showed prices climbed the most in nearly 40 years in the US and by nearly three decades in the UK.

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HSBC has gained more than 23 per cent since the end of December, closing Monday at HK$57.90. Standard Chartered advanced 27 per cent in the same period to HK$58.65.

“It looks like central banks around the world are getting more hawkish to raise interest rates on high inflation,” Citigroup analyst Yafei Tian said in a research note. “For this year, the US is forecast to lead with the number of rate hikes. Hence we are constructive on Hong Kong banks’ margin expansion potential.”

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In the third quarter, HSBC’s return on tangible equity was 9.1 per cent, while Standard Chartered’s was 7.1 per cent. Citi expects them to surpass 10 per cent and 7 per cent respectively by 2024.

Standard Chartered will report its full-year results on February 17 while HSBC will follow on February 22. Investors are hoping for an upbeat forecast as the lenders have endured years of historically low interest rates, which have forced the banks to shift to more fee-based products.

Restrictions by UK regulators on shareholder payouts, including dividends and buy-backs, weighed on their share prices in Hong Kong through much of 2020 as the regulators wanted to ensure HSBC, Standard Chartered and other banks had enough capital on hand to support the British economy during the pandemic slowdown.

HSBC’s shares hit an 11-year low in September 2020 amid investor concerns about rising US-China tensions, a weaker operating environment and its tabled dividends.

Before the pandemic hit in early 2020, executives at both HSBC and Standard Chartered had spoken optimistically about the potential for the Fed and other central banks to raise rates in the future and return to a more normal rate environment.

HSBC, Standard Chartered, Federal Reserve, UK regulators, hit an 11-year low

HSBC CEO Noel Quinn. Photo: AFP/HSBC

However, worries about the pandemic forced central bankers to take rates to historic lows in early 2020.

The Bank of England took its policy rate to 0.1 per cent in March 2020 – the lowest on record for the central bank – and the Fed cut its interest rate range to near zero.

On Thursday, the Bank of England raised its benchmark rate to 0.5 per cent, its second consecutive rate increase, as inflation topped 5.4 per cent in December, the highest level since March 1992.

The Fed is expected to raise rates at its meeting in March and could raise rates at least twice later this year after employers added more jobs in January and average hourly wages jumped higher.

“The Fed is unlikely to see these data as definitive, but as a source of concern. February average-hourly-earning growth (released on 4 March) will have to pull back sharply to relieve this concern,” Standard Chartered economist Steve Englander said in a research note on Monday.

HSBC, Standard Chartered, Federal Reserve, UK regulators, hit an 11-year low

Staff at HSBC distribute lai see packets outside the Kwun Tong branch ahead of Lunar New Year. Photo: Felix Wong

For now, the pressure to increase interest rates in Western economies is in contrast to many Asian economies, where the reopening of economies has been more gradual and not resulted in the same kind of demand shocks, according to ING analysts.

Also, China is going in the opposite direction – lowering policy rates – as it tries to stimulate economic growth.

“The impact of the zero-Covid policy and regulatory blast that has hit sectors from energy to education, and most notably property development in recent months, is weighing on growth to the extent that the People’s Bank of China has been cutting rates since mid-December, and cut again in January,” Robert Carnell, ING’s head of research for Asia-Pacific, and Iris Pang, ING’s Greater China chief economist, said in a research report last month.

“We anticipate more rate cuts over the coming weeks and possible months as well as additional reductions of the reserve rate requirement,” they added.

However, rising rates elsewhere and soaring oil prices could force central bankers in Asia into a more defensive position, according to HSBC.

“Especially for monetary officials in emerging economies, higher global interest rates in turn raise the pressure to tighten as well – not least in Asia, where central banks haven’t been as quick out of the gate to tighten as in other parts of the world,” Frederic Neumann, HSBC’s co-head of Asian economics research, said in a research report on Monday.

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